Demonstrators throw paint bombs in Mexico City, Mexico, on March 10, 2015. Miguel Tovar/STF/LatinContent/Getty Images
Wednesday marks the 77th anniversary of Mexico’s expropriation of its petroleum industry from foreigners, a popular national holiday for the country. President Enrique Peña Nieto Mexico has hit a particularly rough patch as protesters from the teachers’ union march against his education reforms, and activists demanding accountability for 43 murdered students in Guerrero last September continue to cause disruption. Now several other unions and organizations are marching and protesting too, against the government’s flagship energy reforms and the steep cuts in Pemex’s budget. Low oil prices have made the Mexican energy sector’s prospects for long-term viability much less certain, and workers’ discontent only heightens the risks.
The state-owned oil and gas monopoly Pemex has been having enormous difficulties in recent years. Its oil production peaked in 2004 at 3.8 million barrels per day (bpd), and has steadily declined to its current level just under 2.4 million bpd. The constitution’s total prohibition on foreign ownership and participation in the oil and gas industry, combined with high taxes, debilitating political interference, corruption, and outright theft of oil have made Pemex one of the world’s most indebted and inefficient oil producers. While the decentralized, free-market driven shale oil and gas revolution dramatically boosted the proved reserves and daily output of the U.S., Mexico could only look on enviously as it stayed trapped in the past.
Pemex cut its budget for this year by 11.5%, or $4.16 billion, as it scales back investments and delays major refinery upgrade plans. It did not renew the contracts of around 10,000 workers employed through outsourcing companies, and an early retirement scheme could reduce its workforce by 24,000 in total. Pemex also got the politically powerful union to agree to around $650 million in cuts to perks and benefits, and to leave unfilled positions vacant, according to the New York Times. Earlier this month the Energy Secretary said some reduction among Pemex’s 150,000-strong work force would be necessary, a previously unthinkable option given the union’s substantial influence.
However, under Peña Nieto’s leadership, Mexico’s controversial (and ongoing) energy reforms to allow limited foreign participation in certain parts of the oil and gas sector have already averted disaster for Pemex. “Pemex would be in a situation of real emergency if the energy reform hadn’t given us the instruments we now have to use money from third parties to carry out our investment projects,” CEO Emilio Lozoya said in a recent radio interview.
Energy officials admit that a lot is riding on the results of the first auction in July, when the government will award a package of 14 exploration blocks in low-cost shallow waters to private (i.e. foreign) investors. That is, if they’re not scared off by labor unrest and they’re not holding off until prices hopefully rebound. Earlier this month Pemex felt obliged to sweeten the terms of the proposed contracts, lowering the minimum investment amount, easing restrictions on the types of companies that can bid, and allowing private investors to keep a larger percentage of their profits as their returns rise (the rest goes to the government).
On Wednesday, Mexican Finance Minister Luis Videgaray warned “Our opinion is that there’s a low probability that we’ll see a quick recovery in the export oil price, not in the next few weeks, nor even years.” In that case, the latest protests herald many more woes for Pemex and Mexican oil workers alike.
